While increased competition may account for some of McDonald's (NYSE:MCD) 1.7% drop in comparable sales in the first quarter, the real problem may be that families with kids are eating out less often.
Families with children made 1 billion fewer visits to U.S. restaurants over the past six years compared to 306 million fewer visits by adult-only parties, according to a new NPD research report. NPD defines families with kids as those including children under the age of 13. Restaurant visits by that group have been declining since 2008, according to the report.
Visits to restaurants by families with kids account for 20% of overall restaurant sales or $83.7 billion, according to NPD. The only good news for McDonald's is that 70% of the losses from 2008 to 2013 come from families with kids visiting full-service restaurants less often. The bad news for the Golden Arches is that customers aren't bailing out on higher-priced full-service eateries and choosing fast casual or fast food. They are just staying home.
NPD also said that traffic losses were observed for both lower- and higher-income households.
Why is this happening?
Clearly, the economy has played a part in this trend. Though economic conditions have improved in the United States, the chart above shows that despite the lessening of economic pressures for many families and the generally improved economy, visits to restaurants by families with kids have not rebounded.
This suggests that for at least some families, not eating out has become the new normal. While they skipped dinners out during tighter times for financial reasons, they learned they could live without it. And they learned that they had other financial priorities. Whatever the reason, it has become clear that restaurant visits by families with kids under 13 won't recover just because the economy improves.
"In order to bring back parties with kids to the restaurant table, operators and manufacturers need to understand what influences and motivates them to visit," said Bonnie Riggs, NPD foodservice industry analyst. "They need to keep in mind that kids are also an important audience since they have considerable influence on restaurant selections."
What is McDonald's doing?
While only 30% of the drop-off has hit non-full-service restaurants, that's still around $25 billion in lost sales for fast food and fast casual. NPD did not release figures about how the drop has affected any specific restaurant, but given its core business and focus on families with young kids, you have to assume that McDonald's has taken a hit.
The company did acknowledge in its first quarter earnings report that it had "negative comparable guest traffic amid challenging industry dynamics."
Though no specific plans were cited, McDonald's acknowledged that "looking ahead, the U.S. remains focused on improving the restaurant experience through a continued commitment to operations and service excellence, customer engagement, and menu choice to drive sales and profitability." That's a fancy way of saying "we know things are broken and we're going to try really hard to fix them."
One step McDonald's has already taken that could either lure kids in or frighten them away is freshening its Ronald McDonald character. The clown, which the company refers to as its "brand ambassador," will be taking an active role in the chain's social media channels using the #RonaldMcDonald hashtag. The company explains the plan as follows:
As Ronald begins his journey, he seeks to deliver on the mission: "Fun makes great things happen" -- the idea that moments of fun and enjoyment bring out the simple pleasures in life and can lead to acts of goodness.
"Ronald brings to life the fun of our brand by connecting with customers around the world, whether he's promoting literacy or spreading cheer at a Ronald McDonald House," said Dean Barrett, senior vice president and global relationship officer. "Customers today want to engage with brands in different ways and Ronald will continue to evolve to be modern and relevant."
Franchise owners will also have the opportunity to incorporate revamped in-store graphics, furniture, and other design elements featuring Ronald McDonald within restaurant interiors over the next few years. Television ads and promotional materials in the U.S. with the newly reimagined Ronald will begin appearing later this year.
The new Ronald will also be wearing a new wardrobe, including yellow cargo pants and a vest accompanied by a red-and-white striped rugby shirt. His over-sized red shoes will remain the same. There will also be a special occasion outfit for the burger-pitching clown featuring a red blazer with the Golden Arches on the front pocket as well as a bowtie.
Giving its clown a new outfit and a Twitter account seems like a questionable strategy to get families excited about the McDonald's brand again.
What should McDonald's do?
If the recession led families with kids to be more cautious spending their money but unwilling to eat at McDonald's just because it's cheaper, the company needs to find a way to offer both value and quality. One of McDonald's chief rivals in the U.S. is Chipotle (NYSE:CMG), which as of Dec. 31, operates 1,572 Chipotle restaurants throughout the United States as well as a handful of international stores.
The fast casual Mexican eatery reported first quarter sales that rose 24.4% from the prior year period. The growth in revenue was from a 13.4% increase in comparable restaurant sales and new restaurants not in the comparable base, according to the company. "Comparable restaurant sales growth was driven primarily by increased traffic and to a lesser extent by an increase in average check," the company added.
Chipotle has higher-priced food than McDonald's. There is no dollar menu and the restaurants offer much less discounting. What Chipotle does have is a clear commitment to food quality, which it makes every effort to explain to its customers. If you're not eating out as often and are unwilling to spend the money for a full service meal, it just feels better to take your kid (or kids) to Chipotle than it does to go to McDonald's. Chipotle costs a little more, but the beef, chicken, and pork are clearly beef, chicken, and pork. There's not a grey patty, a McNugget, a McRib, or their equivalents anywhere on the menu.
Clearly, McDonald's can't change its entire business and become an earth-friendly purveyor of locally sourced organic foods. It can, however, offer some better choices. It's not enough to offer apple slices in Happy Meals or have some salads on the menu. The company needs to find a way to offer higher-quality choices for adults along with healthier ones for kids that they may actually choose.
Both are a tough order, but if McDonald's wants to reverse its sales slide then increasing business with families with kids is a logical target. Better and healthier food could help the company get there faster than buying a bowtie for its mascot.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Chipotle and McDonald's. The Motley Fool owns shares of Chipotle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.